Test #4 - Problems Portion

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Merced College *

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Accounting

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Feb 20, 2024

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&) 23 40+ 90307 \A+24.6- NA=$4A10 ©) Managerial Accounting 4B Name\)Q\t\/\Q‘ M&m& Test #4 (Chapters 12-14) Part 2. Problems. There are six problems. Each one is worth the score indicated next to the problem number. Show all work for complete credit. You may attach extra pages if you so desire. Please be NEAT when writing your answers. I cannot grade illegible answers. (50 points possible which includes 10 bonus points possible) 1. (10 points) Fothergill Company makes 40,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: Direct materials .......... ccceeeevveieiineeeecneeennee, $23.40 Direct 1abor ...... ooveeeeeeiiiieeeeeee 22.30 Variable manufacturing overhead .............. 1.40 Fixed manufacturing overhead .................. 24.60 Unit product COSt ........ covvevveeeeeeereeeeneeennne. $71.70 An outside supplier has offered to sell the company all of these parts it needs for $59.10 a unit. If the company accepts this offer, the facilitics now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $390,000 per year. If the part were purchased from the outside supplier, all of the direct labor, direct materials and variable manufacturing overhead costs of the part would be avoided. However, $21.90 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products. Required: a. How much of the unit product cost of $71.70 is relevant in the decision of whether to make or buy the part? b. What is the net total dollar advantage or (disadvantage) of purchasing the part rather than making it? (remember that the facility could be used to produce a different product if we purchased the parts from the outside). c. What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 40,000 units required cach year? Q) 2BILLNC ¥ 400D SADS QX e mLoos 2588009 46,000 %23 4= o & 0Q 0 2=3%3.000 - D8 T w,o&: t:z < LROO \ OO0 %\@ - bt ‘QQ Q 10 ‘000") 3= . \1,0\0 PO s\% LS ok \-@p.\ 2,312000 d\sodm“\cwx‘ 2,333 000 - 2L HOC™
2. (10 points) (Ignore income taxes in this problem.) Axillar Beauty Products Corporation is considering the production of a new conditioning shampoo which will require the purchase of new mixing machinery. The machinery will cost $310,000, is expected to have a useful life of 10 years, and is expected to have a salvage value of $35,000 at the end of 10 years. The machinery will also need a $25,000 overhaul at the end of year 6. A $40,000 increase in working capital will be needed for this investment project. The working capital will be released at the end of the 10 years. The new shampoo is expected to generate net cash inflows of $80,000 per year for each of the 10 years. Axillar's discount rate is 12%. Required: a. What is the net present value of this investment opportunity? b. Based on your answer to (a) above, should Axillar go ahead with the new conditioning shampoo? Description Cash Flow | PV/PVA Factor | PV of Cash Flow Purchase Machine (2\0 ,000\ | (30 @OCS\ Working Capital (40,000 l ( 40,0600) Overhaul yr. 6 (25.003) 0.S0l QoL LS Annual Cash Inflows | $0,0Q0) S.00502 45) O\ Salvage Value 35,000 0.2 220 L, 200 Release of Working Capital 40,000 0-3220 \2.3¢0 Net Present Value W 3,500 ) Axillor Sncdd an oXeod with Moe nees Condiitotng Sromgao. 3. (6 points) (Ignore income taxes in this problem.) Jimmy Chitwood, Inc. is considering a project that is estimated to generate annual cash inflows of $35,000. The equipment required for the project would cost $266,210. The project would last 15 years. What is the project’s internal rate of return (round to the nearest percent.) 20LL,2\6 23,000 = M. LoL > \O/. *\’&d M 0% . & Qfl\\x\\\\ o QQ\'\QI‘
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